Thursday, January 12, 2017

Generational Split Dollar

By: Bill Jackson J.D., CLU®, Sr. Advanced Markets Consultant at Partners Advantage

Generational split dollar consists of a trust structured for the benefit of Generation C (age 27). This trust would own life insurance on Generation B’s (age 58) life. Generation A (age 88) would enter into a non-equity collateral assignment split dollar agreement with the trust. In searching for methods of discounting the value of a wealthy client’s estate, the concept of generational split dollar should not be overlooked. This is especially the case if the client is very old or perhaps uninsurable and wants to do some later life estate planning. For example, a Generation A client (age 88) makes a personal loan of $3 million to a grantor irrevocable life insurance trust established for the benefit of Generation C (age 27). The trust purchases a life insurance policy on the life of an individual in Generation B (age 58). The client receives a note which becomes an account receivable. This account receivable is worth less than $3 million due to the restrictive right to be paid back only at a future date out of cash values or at the death of Generation B. Because of Generation B’s expected longevity, and other factors, the appraiser values the note at $750,000. The result is dramatic estate tax savings relative to an outright gift of $3 million.

A recent court case, Estate of Clara M. Morrissette - United States Tax Court, the court ruled in favor of the estate. It is important to note that all current split dollar rules were followed meticulously. The trusts involved were likewise established for valid separate purposes. Therefore, if this design is executed correctly it can transfer significant wealth and provide a dramatic estate tax reduction. Care should be taken not to sell or cancel the policy, merge the trust with another trust with the same beneficiaries, or for the donor to have access to the cash values, as this could cause the transaction to be viewed as a step transaction to avoid taxation and therefore fail.

Read the full article: "Serving Clients With Estate Planning Needs" first published in the December 2016 Broker World magazine here.
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For financial professional use only. Not for use with consumers.

Policy loans and withdrawals will reduce available cash values and death benefits, and may cause the policy to lapse or affect any guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of un-recovered cost basis will be subject to ordinary income tax. Tax laws are subject to change. 

Partners Advantage Insurance Services and their representatives do not give tax or legal advice.  Accordingly, any tax information provided is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. Encourage your clients to consult their tax advisor or attorney.
Income tax free distributions are achieved by withdrawing to the cost basis (premiums paid), then using policy loans.  Loans and withdrawals may generate an income tax liability, reduce available cash value, and reduce death benefit, or cause the policy to lapse.  This assumes the policy qualifies as life insurance and is not a modified endowment contract.

Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with any accrued loan interest, will reduce the policy's account value and death benefit. Assuming a policy is not a Modified Endowment Contract (MEC), withdrawals are taxed only to the ex that they exceed the policy owner's cost basis in the policy and usually loans are free from current federal taxation. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions.

The tax and estate planning information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Partners Advantage does not provide legal or tax advice. Partners Advantage cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Partners Advantage does not assume any obligation to inform you of any subsequent changes in the tax law or other factors that could affect the information contained herein. Partners Advantage makes no warranties with regard to such information or results obtained by its use. Partners Advantage disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.